'Devil is in the details' for lenders transitioning from Libor: MBA

Commercial and multifamily mortgage lenders need to figure out their plan for replacing the London interbank offered rate index potentially expiring at the end of 2021.

The urgency and uncertainty surrounding the issue beckoned memories of the Y2K scare for at least one executive. The Mortgage Bankers Association, which suggested the commercial real estate finance industry start preparing for the transition back in January, just released a survey of lenders that found while 92% of respondents already have plans conceived, their actual courses of action differ.

"The vast majority of commercial and multifamily mortgage lenders report they are working on the transition away from Libor, but the devil is in the details," Jamie Woodwell, the MBA's vice president of commercial real estate research, said in a press release.

"Most firms are already taking some steps, including changing language in loan documents, but they also report relying on regulators and industry-bodies to make decisions before they take certain actions. The net result is a fair amount of uncertainty about the mechanics of the transition away from Libor, and an overall hesitation as many firms wait for others to lead the way," Woodwell continued.

Once that definitive road for a replacement gets laid out, it'll have a ripple effect through the industry. That replacement would need to cover new and legacy adjustable-rate mortgages, securities and credit risk transfer instruments. An estimated $1.2 trillion of commercial and multifamily mortgages are tied to Libor, according to the Alternative Reference Rates Committee.

"Over the past few weeks you've seen fallback language from several different consultations the Fed put out for bilateral and securitized loans. They also recommended using SOFR," Andrew Foster, the MBA's director of commercial real estate finance, said in an interview.

The secured overnight financing rate offers a Libor alternative, though perhaps not an ideal replacement. SOFR comes virtually risk-free, while Libor reflects the risk of banks lending to each other. As the name indicates, SOFR is also an overnight rate, while the most frequently used Libor rates are for one-, three- and six-month tenors.

About 77% of survey respondents already adjusted Libor fallback language in all their new loan documents and 56% said they're on track in preparing for a post-Libor future. But every operation will need to tailor their transition plans based on their lending type, investors and volume, among other factors.

"MBA and its Libor Outreach Committee of members are developing resources to educate market participants and help ensure all stakeholders are focused on the important issues, with the goal of a smooth transition," said Foster. "Given all that is at stake for the commercial real estate debt markets, as well as many other asset classes that utilize Libor, an ounce of preparedness is worth a pound of cure."